These 4 Measures Indicate That Balkrishna Industries (NSE:BALKRISIND) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Balkrishna Industries Limited (NSE:BALKRISIND) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Balkrishna Industries

How Much Debt Does Balkrishna Industries Carry?

As you can see below, at the end of March 2021, Balkrishna Industries had ₹10.0b of debt, up from ₹9.31b a year ago. Click the image for more detail. On the flip side, it has ₹4.47b in cash leading to net debt of about ₹5.54b.

How Healthy Is Balkrishna Industries' Balance Sheet?

According to the last reported balance sheet, Balkrishna Industries had liabilities of ₹19.0b due within 12 months, and liabilities of ₹2.65b due beyond 12 months. On the other hand, it had cash of ₹4.47b and ₹8.82b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹8.38b.

Having regard to Balkrishna Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹473.5b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Balkrishna Industries has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Balkrishna Industries has net debt of just 0.31 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. On top of that, Balkrishna Industries grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Balkrishna Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Balkrishna Industries's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Balkrishna Industries's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Looking at the bigger picture, we think Balkrishna Industries's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Balkrishna Industries that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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